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Translating the Warren-Yellen Exchange

posted by Adam Levitin

Senator Elizabeth Warren surprised a lot of people by laying into Federal Reserve Board Chair Janet Yellen as hard as she ever laid into Timothy Geithner. I think this was a really important exchange. But it's easy to miss exactly what's being communicated in it. Senator Warren's comments can basically be translated as follows:  

"Janet, I like you, but let me level with you. You need to replace your General Counsel, pronto. He's not on the same page about regulatory reform, and it's a problem. There's really no place for obstruction by Fed staffers, even the General Counsel. It's time for him to go."

There was a further subtext, though, that I think should be highlighted, and that's "What you do about your GC is a shibboleth about whether you're serious on regulatory reform."

One of the huge issues left largely untouched by the Dodd-Frank Act was the problem of deregulation by regulators (as opposed to Congress).  This regulatory deregulation took a lot of forms, from failure to enforce existing laws to active campaigns to preempt states from enforcing laws.  Dodd-Frank addressed the most egregious problem by killing off the Office of Thrift Supervision, but it left the OCC untouched (other than pushing back on preemption standards) and the Fed intact.  

Critically, Dodd-Frank did nothing to address the root causes of this regulatory deregulation. Fortunately, Senator Warren is all over this issue, namely the various forms of regulatory capture. What Senator Warren has recognized is that it's not enough to have the right people at the very head of key agencies. The next couple of levels of staffers are just as important. They are the ones who are making many of the key decisions. That's why it was so important when the OCC got a new general counsel.  That's why the Antonio Weiss nomination fight was so important. And that's why Scott Alavarez, the Fed's GC, is in Warren's crosshairs. 

Did Yellen get the message?  Yves Smith thinks she didn't. I'm not sure whether we should read so much into Yellen's post-hearing comments.  Removal of top staffers is often done quietly and politely (and Alvarez is civil service, I believe). But we'll see.  

In any case, Yellen's been given the message that she needs to make sure her entire team is marching in the same direction and to the same beat.  Yellen's willingness to ensure that the top level of Fed staffers are pursuing the Board's policies, irrespective of their personal predilictions, is the true measure of whether she is herself committed to reform. That's how Yellen can walk the walk, not just talk the talk.

I'm hopeful that Yellen understands this, but if she doesn't, she is dooming the Fed to being stripped of its bank regulatory powers whenever the next round of reform happens. The Fed is not a politically popular agency. It's powerful and mysterious, but it doesn't have a super strong political constituency backing it. The Fed almost lost its regulatory role in 2010. If it cannot demonstrate that it can handle the role responsibly, the task could easily be transferred to a regulatory with a more attentive institutional culture. 


What so hard to understand? If banks are to continue to be heavily privileged* by government (thus risking systemic failure) then they should be closely regulated.

If the banks desire to be totally unregulated then let them lobby for the removal of all their government privileges too.

*Government deposit insurance instead of a Postal Savings Service for the risk-free storage of and transactions with fiat, borrowing by the monetary sovereign, a fiat lender of last resort, etc.

Fed staffers are not civil service. The Fed is an agency of Congress, not the executive branch.

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